>FMCG Sector (MOTILAL OSWAL)

Prices of crude-linked inputs appear to have de-coupled from crude prices
Prices of major crude-linked inputs for FMCG players (palm oil, LAB, and packaging material) appear to have decoupled from crude prices in the last couple of months. Though crude prices have continued their slide, prices of these inputs have moved up by 20-40% from the panic bottoms. Palm oil prices have increased from MYR1,415/ton to current levels of MYR1,900/ton, a 35% upside. Similarly, HDPE prices have risen 22% from the bottom, while LAB prices have been flat in February and March (despite ~10% fall in crude prices). Our interactions with industry players suggest that some of these commodities are unlikely to test the recent bottoms.

Agri-based commodities remain a mixed bag
Agri-based inputs remain a mixed bag, as the prices of copra, safflower, coffee and barley are on a decline, while the prices of sugar, liquid milk and wheat continue to hold firm. We believe that the prices of sugar, wheat and milk would continue to rule firm. Sugar production has been low and minimum support price (MSP) of wheat has been increased by 8%. Copra and safflower prices are likely to be weak due to start of flush season. Barley malt prices have declined globally, but processed malt prices are expected to decline once new capacities go on-stream in the next few months. Agri-commodity inflation is likely to be significantly lower than the levels seen in the last couple of years.

Rupee depreciation to limit gains from lower cost of imported inputs
The rupee has depreciated ~33% from Rs39-40/US$ in January 2008 to the current ~Rs52/US$. This has neutralized the gains from decline in input prices to a certain extent. Users of commodities like palm oil, skimmed milk powder, solvents, LAB, HDPE, barley, coffee and cocoa will have limited gains from decline in input prices, as rupee depreciation will neutralize the impact, significantly. Rupee depreciation will limit gains from palm oil price reduction for HUL and GCPL. Nestle and Britannia will be adversely impacted due to rising sugar and wheat prices. Marico will gain from lower prices of copra and safflower oil.

To see full report: FMCG SECTOR